Allos and Amag go separate ways into uncertain future

The proposed merger between Allos Therapeutics and Amag Pharmaceuticals never had the look of a story with a happy ending. Instead it appeared to be an alliance built on desperation and the vain hope that bringing two weak products under one roof might, just might, create a stronger company.

As such the decision last week by Amag shareholders to reject the union came as little surprise and now leaves the two companies back where they were, or arguably even worse off given the distraction the proposed merger created for their sales teams fearful for their jobs. It also leaves big question marks over whether the Amag management team, which already had a fractious relationship with shareholders, will survive this debacle in their current form.

Regime change?

Brian Pereira, the chief executive, is now certainly seen as a damaged brand given the strong initial negative reaction to the tie up that saw Amag shares drop 14% after the deal was announced and continue to plummet as more and more shareholders came out and voiced their opposition to the deal.

Chief among investors complaints were that the proposed $55m-$60m cost synergies in the first fiscal year were unrealistic. Many struggled to see the overlap talked up by both management teams between Amag’s iron replacement product Feraheme, used in chronic kidney disease, and Allos’s lymphoma drug Folotyn.

Speaking yesterday on a conference call Mr Pereira sought to draw a line under the past and move on. Whether disgruntled investors, who have questioned his ability to create shareholder value, will allow him is another matter.

New horizons

With no sign of hedge fund MSMB Capital continuing its interest in Amag, the pillar of the new strategy for group's independent future is label and geographic expansion for Feraheme (Hedge fund makes offer to derail Amag-Allos merger, August 3, 2011). The company is angling to get approval in the wider indication of iron deficiency anaemia and approval for chronic kidney disease in other locations.

But approval in anaemia would put Amag firmly in the primary care market where it has little experience, given the hospital setting of Feraheme, and which would require significant resources for a single product company.

Acknowledging these difficulties, Mr Pereira said the group would be looking to license the drug in this indication. “We are looking at partnering and other opportunities to make sure when the product gets approval for a broader indication it is spearheaded by a company that can drive both referral and treatment in that indication.”

Fresh blood

However, if the group manages to secure a partner it may not be able to secure particularly favourable terms given its current weakened financial position and the drug's poor performance so far. Amag plans to file an NDA in second half of next year and expects a decision in the second half of 2013.

The group is also looking for product deals to build scale. But perhaps most interesting was the statement that Amag would be looking to ‘augment’ its leadership to help it achieve its goal of becoming a multi-product specialty pharma company.

Although Mr Pereira refused to elaborate, on the new appointments, there will almost certainly be the hope that the changes could go all the way to the top.

The jilted bride

For Allos, the position of management seems a little more secure. Its shareholders voted in favour of the merger, an outcome that might say more about Allos’s limited options following the termination of discussions with a mystery second bidder than their desire for the Amag merger (Allos could have a plan b in the form of Company A, September 22, 2011).

But by saying yes, the group is entitled to a break fee of $2m from Amag, a sum that should go some way to covering its merger expenses and even leave a little over, which could come in handy as it is unlikely any other bidders will come knocking.

Allos will now try to get on with selling Folotyn, which has failed to show any growth since the fourth quarter of 2010. Analysts at Leerink Swann believe that sales could slow further given anecdotal reports of physician concerns over mucositis and limited durations of therapy.

The only near term catalyst for Allos is the potential approval of Folotyn in Europe in peripheral T-cell lymphoma, an event scheduled for early 2012. While few analysts are expecting approval to massively improve the company's fortunes due to lower pricing of drugs in Europe and the small market size for PTCL, any stumbles on the way to approval or failure could see the already struggling Allos reach the end of the line.

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